New LPF & OFC Regimes: How investors can seize opportunities
''As a result of such a framework, Hong Kong's reliance on offshore jurisdictions for asset management has been significantly reduced."
Hong Kong: from an "exit" to an "entrance"
Before the establishment of the Limited Partnership Fund ("LPF") in Hong Kong, firms would choose to set up their Private Equity ("PE") funds in offshore centres, such as Cayman Islands and British Virgin Islands, because of their sophisticated PE regimes, up-to-date legal structure, and a tax neutral platform. As China has transformed into one of the major outbound investment hubs, Hong Kong becomes an attractive fundraising platform for investors interested in the Chinese market. At the same time, a significant number of PE capital was advised out of Hong Kong every year, but none of these funds were domiciled in the city.
The Limited Partnership Fund Ordinance (Cap.637) ("LPFO") established on 31 August 2020, launched an LPF regime that is comparable and competitive to other offshore PE fund structures. This new law has made Hong Kong’s existing legal and regulatory framework more attractive for PE funds. Together with the Hong Kong government’s previous initiatives to launch the open-ended fund companies ("OFCs") regime in 2018, these developments are expected to attract more onshore funds to Hong Kong and facilitate capital flow between the city and the rest of the Greater Bay Area. With more investing options available, investors can now choose to set up an LPF or an OFC in Hong Kong or re-domicile their existing funds from offshore jurisdictions back to Hong Kong.
In 2019, the Hong Kong Inland Revenue Department established the Unified Fund Exemption ("UFE") plan, which allows investors in LPFs and OFCs to enjoy certain exemptions from Hong Kong profit tax. In contrast to the prior Fund-level Tax Exemption for offshore funds, UFE treats both offshore and onshore funds equally, regardless of their size, location, or purpose. As a result of such a framework, Hong Kong’s reliance on offshore jurisdictions for asset management has been significantly reduced.
Overview of LPF and OFC in Hong Kong
A Limited Partnership Fund ("LPF") is a type of fund in the structure of a limited partnership that manages assets for the benefit of its investors. In Hong Kong, given the opt-in nature of the LPF regime, it is not compulsory to register the LPF under the Limited Partnership Fund Ordinance (Cap.637).
Open-ended fund company ("OFC") is an open-end fund in corporate structure with limited liability and variable share capital. It is regulated by the Security and Futures Ordinance (Cap.571), the Securities and Futures (Open-ended Fund Companies) Rules, and the Code on Open-ended Fund Companies. Different from companies registered under the Companies Ordinance (Cap. 622), OFCs do not engage in general commercial or industrial undertakings but manage investments for the benefits of its shareholders instead.
There is no fixed answer as to which PE option is better. Whether to set up an LPF or an OFC would depend on factors such as the investment terms, the investment portfolio, preference of the fund manager and investors, background of investors, and scope of investment. For more information regarding each fund's structure, advantages, and disadvantages, please refer to our upcoming Limited Partnership Fund and Open-ended Fund Company articles.
''With more investing options available, investors can now choose to set up an LPF or an OFC in Hong Kong or re-domicile their existing funds from offshore jurisdictions back to Hong Kong."
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
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